Dollar Set to Drop as Market Misprices Rate Hike Risk, TD Warns

TD Securities expects the US dollar to weaken if the Federal Reserve keeps interest rates unchanged this week, according to strategist Howard Du. The market is currently mispricing the risk of rate hikes heading into Wednesday's policy meeting.

Du believes that a rate hold decision with two or fewer dissents from Fed policymakers would lead to knee-jerk weakness in the dollar as the event risk premium fades away. If all policymakers are in agreement, which would be a surprise for the market, it could result in a larger selloff of the dollar.

TD expects Bloomberg's measure of the dollar to fall 0.5% if there is no dissent at the July decision. The bank also predicts that a rate hike this year has lifted the dollar and combined with haven flows buoyed by the Middle East conflict has pushed the gauge up nearly 3% since the war began.